There is huge market potential in China as the country is beefing up its campaign to modernize its telecommunications sector.

Though progress has been made in the sector in the past decade, the telecommunications consumption level in China is still low compared with other regions of the world.

In 1998, telecommunications consumption in China was US$16.4 per capita, about 13 percent of the world average level. China had only 10 million Internet users by July 2000, about 0.8 percent of the country's population, while in the United States, more than 170 million people - 71 percent of its population - have access to the Internet.

To realize sustainable development, the sector should address three major problems.

Firstly it should find new financial channels to further its development.

Capital for China's telecommunications sector mainly comes from two sources. One is through collecting telephone installation fees and some subsidiary charges, which raised about 240 billion yuan (US$29 billion) for telecommunication construction by the end of 1999, about half of the fixed assets value of the sector.

The other is through government investment. The sector has increased its fixed assets value by artificially stepping up the depreciation of its equipment since 1993, which means it will be able to get more funds from the State to make up for the exaggerated loss of assets.

However, with the gradual cancellation of these policies, China's telecommunications sector will no longer receive free aid from the government. When prices in high-profit businesses like international calls and long-distance calls are reduced and mobile calls are farmed out to other companies , less money is available to subsidize the local calls sector. Also, the policy of quickened depreciation is not a long-term policy because the government is reducing its activities in the marketplace.

A second tough problem is the readjustment of telecommunication fees. The application of high technology has enabled the sector to lower its operational costs. But most consumers with middle and low level incomes find it difficult to afford the charges for local calls, which are raised when the cost of other calls is lowered. This is the biggest problem in restructuring telecommunications charges.

Risks also lie in the low proportion of home-made high-tech equipment in the sector. Thus this is the third problem- fostering the domestic manufacturing and software industry.

Under the open market system, the market should play a basic role in allocating resources. What the government should do is to set the rules and keep the market in order.

The government should do the following first: set up a telecommunications law as soon as possible for better management; complete rules to facilitate the entering of newcomers to break up the monopoly; and build an effective, transparent and impartial system to settle disputes to ensure fair competition.

Since 1999, there have been more and more price-cut promotions in the market and sometimes there are competitions among enterprises. The government should set price guidelines for enterprises.

For historical reasons, China's telecommunications business used to be exclusively operated by China Telecom, an enterprise under the government's direct administration. China Telecom took on public telecommunications services like disaster relief communications and network construction in suburban and rural areas.

Today, now that the market is open to other competitors, this obligation of public service should be spread around. A funding system should be set up according to international practices for public telecommunications.

However, the development experience of the telecommunication industry in other countries shows that the market should be opened step by step. Thus business fields that will be opened to foreign investment after China enters the World Trade Organization should first be opened up to domestic investment.

According to international practices, the money given to the government to invest should be used to cover public services in remote districts and rural areas and the cost of industrial planning and supervision.

Before the market is opened to foreign investors, charges such as as installation fees should be cancelled. The government should sign contracts with enterprises to prevent the loss of enterprises' fixed assets invested in by the State.

Prices can be the direct signal guiding the allocation of resources in the market. The government should gradually lift its control on prices for a rational development of the telecommunications sector. And lowering prices through market competition can be a practical way to open the market further.

But at present, when China's telecommunications industry is still under a monopoly, the government should control the prices of telecommunications services.

The central government should just set pricing principles and methods, leaving the job of setting specific price guidelines to local governments.

The central government should only control the prices of the most basic services such as fixed local calls.

China's telecommunications industry has achieved rapid growth since the 1990s. The total income of the sector in 1999 was 37 times of that in 1990, an annual increase of 50 percent. It only took China ten years to finish changing the old style telephone exchange system to a the modern computerized system, which took the West about half a century to do. But today there needs to be further reform for sustainable development.

(China Daily 06/15/2001)